You've probably seen this quote or something like it as the lede to an article about the legal education system's woes, the excessive tuition, juked employment stats, unemployment in the legal labor market, and avenging scambloggers taking to the Internet.

Until recently, the final paragraph would close--as Becker's does--with something like, "And now, a new group calling itself 'Law School Transparency' is asking…" You get the idea.

Here's the thing. The "Golden Ticket" lede is utterly false. The legal sector of the U.S. economy has actually been ailing for quite some time. Lacking an economist-in-residence, the American Bar Association lives in ignorance. Unfortunately, law professors sometimes make things worse by propelling the "Golden Ticket" fiction, even when researching in good faith, not that it excuses journalists' ignorance. For example:

"Spending on legal services grew from 0.4% of America’s GDP in 1978 to 1.8% in 2003."

This factoid appears in both Jack Crittenden's, "A Wise Investment" (National Jurist, March 2010) and in "A Less Gilded Future" (The Economist, May 5, 2011), which further characterizes the late twentieth-century legal profession as enjoying a "good long run." The latter adds, "The legal business grew four times faster than the economy"—a specific point to which I'll return later. Though the articles attribute the datum to University of Indiana-Bloomington law professor Bill Henderson, its original source is University of Wisconsin law professor Marc Galanter’s article, "Planet of the APs [Artificial Persons]: Reflections on the Scale of Law and Its Users,"[1]. Galanter uses a combination of the Census Bureau's "Service Annual Survey" and the Bureau of Economic Analysis's (BEA) GDP data to depict the legal sector's share of GDP, which illustrates the relative growth rates between the two.

There are four problems with the "Golden Ticket" fallacy as presented here:

1). The numbers are wrong. According to the BEA, they are 0.8 percent (1978) and 1.5 percent (2003). More accurately, they're 0.83 percent and 1.47 percent, respectively. So instead of a fourfold increase in the legal sector's share of the economy, we're talking about 77 percent. Not the same thing. To Galanter's credit, the Census Bureau updates the "Service Annual Survey" yearly, so the numbers may have been revised since then. However, I cannot find census data going back as far as Galanter does.

2). Two data points do not a trend make. No gently increasing trend connects the legal sector of 1978 to that of 2003. Galanter, at least, bothers to graph it; the National Jurist and The Economist do not.

This is the most recent version.

While we should credit him for at least presenting the data, Galanter doesn't see the significance of the legal sector's slowdown in the 1990s, which leads us to…

3). Legal services are more expensive than ever before! Due to growth and inflation, we shouldn't be surprised if the nominal cost of legal services is higher than before. Hopefully income would be too. The Census Bureau’s data are in nominal "current dollars," not inflation-adjusted "constant dollars," making this a consequential error on Galanter's part. Thus, if we're going to compare the size of the legal sector to the overall economy over time, we must take inflation out from nominal GDP and use "real value added by industry" with 2005 as the base year. The BEA obliges.

So in 1978, the legal sector's real output was 2.01 percent of GDP; in 2003, it was 1.55 percent—a 22.9 percent contraction. In 2009 it fell to 1.37 percent, a record low as far as we know.

4). Growth is measured in stuff. The legal sector's share of GDP only tells us how growth in the legal sector compares to the overall economy, but we have the nominal legal sector value added and the legal sector deflator, so let's just look at real spending on legal services already.

If I knew nothing about the American legal sector and you showed me this graph, I would say that with an R­2 of .8822 it’s remarkablyvolatile. I would not, for example, characterize the run that lawyers had as "good," or "long" as The Economist does. Instead, I would say that this is an industry that has been undergoing serious structural changes since it fell into stagnation in the 1990s. I suspect that many smaller practices were wiped out in this time period, unnoticed by the ABA and the public.

Return to this statement by The Economist: "The legal business grew four times faster than the economy."

As stated above, share of GDP and actual growth are not the same thing. Even if we assume The Economist’s fantasy legal sector increased from 0.4 percent to 1.8 percent of GDP we get this:

1978

2003

Percent Growth

Annual % Growth

GDP Nominal

$2,293.8 billion

$11,142.1 billion

385.7%

6.5%

Legal Sector Nominal

$19.1 billion

$163.5 billion

756.0%

9.0%

Economist's Legal Sector

~$9.2 billion

~$200.6 billion

2,080.4%

13.1%

GDP Real (base, 2005)

$5,677.7 billion

$11,840.7 billion

108.5%

3.0%

Legal Sector Real (base, 2005)

$114.2 billion

$183.35 billion

60.6%

1.9%

Only if we divide the ludicrous 2,080.4 percent figure by 385.7 percent GDP growth do we get a fivefold number, but nominal total legal sector growth over that time period was actually twice as fast as GDP, not four times as The Economist claims. Looking at real value added, we find very much the reverse: in a typical year GDP outgrew the legal sector by 1.58 times (3.0 percent divided by 1.9 percent).

I loathe the Matrix, but here's your legal sector red pill.

From 1983 to 1990, the legal services sector grew at an annualized rate of 5.29 percent from $113.33 billion to $162.58 billion in constant dollars. Much of that occurred in 1988 when the sector saw a tremendous 13 percent surge. (Savings & Loan litigation perhaps?)

Even though the legal sector resumed growth along with our recent bubbles, the growth rates between it and the U.S. economy tell us that the legal sector hasn’t really kept up.

What’s going on here?

Two things happened between 1990 and 1997. One, while the rest of the economy grew in the 1990s, the legal sector fell into intra-economic recession twice. Two, the legal sector contracted to 1.5 percent of the real economy. I see this not as a slack in demand but as something else: maturity, which the Economic Glossary defines as:

"The third stage in the product life cycle, characterized by flattening of sales and decreasing profit margins. Advertising and promotion are used to maintain market share and to prevent the erosion of sales and profits. During this stage, the initial decline of a product begins and many businesses try to "re-invent" their products to prevent the upcoming decline stage. Many times the company finds new uses for an existing product (baking soda as a deodorizer), totally new markets (foreign countries), or a way to enhance the existing product to make it better and to re-start the life cycle. The television has gone through at least two life cycles, first from black and white to color and then from color to high definition (HD) and plasma. Along the way there were enhancements such as remote control, VCRs to complement them, and cable to help with reception."

Unlike some products (VCRs), legal services will always be in demand, but they will only account for at most 1.5 percent of the real economy because legal services are an intermediate good: they're a catalyst for economic activity and never an engine for growth. The best that firms can do is improve efficiency and—to the extent they are allowed—increase advertising, a practice I believe feeds the growing emphasis on lawyer credentials. Maturity rewards efficient firms that can benefit from economies of scale, causing smaller practices to close and larger ones to flourish. This explains the growth and consolidation seen in high end legal service providers. Once the pond stops growing, the issue turns to how its resources are distributed. For law firms, demand for those perceived to be the best attorneys increases. I suspect this also explains the birth of the bi-modal starting salary distribution, which also formed in the 1990s.

Maturity also implies that the legal education system’s then-tolerable inefficiencies hit a wall. Normally, market forces would have required law schools to adapt, but generous helpings of federal financial aid and the ABA’s near-monopoly on accreditation has prevented that, and we can see the rising tuition as a result of increased competition for high-quality students.[2] I believe maturity even explains the impact of U.S. News’s rankings. If jobs were plentiful, then law school prestige wouldn't matter as much.

So the legal sector did not grow much in the last twenty years, yet lawyers' student debts did. Today's debt-benighted graduates aren’t a sudden phenomenon from the housing bubble bust and subsequent stagnation per the consensus opinion of law professors (ex. Alan Meese's "ScamLaw and the Macroeconomy"). Rather, they are the endgame of twenty years of U.S. legal profession decay.

Returning to the topic: The mainstream media’s insistence on presenting the "Golden Ticket" fallacy is pernicious not because it's lazy, uninspired writing promoting an inaccurate explanation of the legal profession's problems, but because it conceals an eerie, hallowed "SmallLaw Dead Pool," haunted by the ghosts of failed practices, debt-slaves, and disrupted lives. Unacknowledged by the profession, concealed by the law schools.

Matt Leichter is an attorney licensed in Wisconsin and New York, and he holds a masters in International Affairs from Marquette University. He operates The Law School Tuition Bubble, which archives, chronicles, and analyzes the deteriorating American legal education system. It is also a platform for higher education and student debt reform. This post is based on a page at that site.

Comments

A quick question on how you deflated your numbers: how does 1978 nominal GDP of $2.3tr become $5.7tr in real dollars, but $19.1bn in nominal for the legal sector become $114bn? Did you use different deflators, and if so, why?